UNITED STATES OF AMERICA, ET AL., APPELLANTS V. ALVIN HEMME, ET AL.
No. 84-1944
In the Supreme Court of the United States
October Term, 1985
On Appeal from the United States District Court for the Southern
District of Illinois
Brief for the United States
TABLE OF CONTENTS
Question Presented
Opinion below
Jurisdiction
Constitutional and statutory provisions involved
Statement
A. The statutory framework
B. The proceedings in this case
Summary of argument
Argument:
The transitional rule incorporated in Section
2010(c) is valid as applied to appellees
A. There is no merit to appellees' statutory
argument, or to their related assertion that
Section 2010(c) as applied to them results in
double taxation
B. The application of the 1976 Act to the
Hirschi estate did not deprive appellees of property
C. The district court mischaracterized Section
2010(c) as retroactive legislation
D. The district court erred in equating retroactivity
with unconstitutionality
E. Congress provided ample advance notice of the
transitional rule that it enacted, and this fact
eliminates any basis for a claim of objectionable
retroactivity
Conclusion
OPINION BELOW
The order of the district court (J.S. App. 1a-6a) is unreported.
JURISDICTION
The judgment of the district court (J.S. App. 7a) was entered on
January 23, 1985. A notice of appeal to this Court (J.S. App. 8a) was
filed on February 21, 1985. On April 16, 1985, Justice Stevens
extended the time for docketing the appeal to and including June 21,
1985. The jurisdictional statement was filed on that date, and
probable jurisdiction was noted on October 7, 1985 (J.A. 23). The
jurisdiction of this Court is invoked under 28 U.S.C. 1252. A direct
appeal lies where, as here, a federal statute has been held
unconstitutional as applied. United States v. Darusmont, 449 U.S.
292, 293 (1981) (per curiam).
CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED
The relevant constitutional and statutory provisions are set forth
in the appendix to the jurisdictional statement (J.S. App. 9a-11a).
QUESTION PRESENTED
Whether, in computing the federal estate tax payable by the estate
of a decedent who died on November 9, 1978, amendments to the federal
tax laws passed by both houses of Congress on September 16, 1976, and
approved by the President on October 4, 1976, may constitutionally be
applied to ascertain the effect of gifts made by the decedent on
September 28, 1976, and of an election made by him in a federal gift
tax return filed on September 30, 1976.
STATEMENT
In 1976, Congress significantly changed the relationship between
the federal gift tax and the federal estate tax. Previously, a
taxpayer had been entitled to a lifetime "specific exemption" of
$30,000 for gift-tax purposes, and his estate had been entitled to an
exemption of $60,000 for estate-tax purposes. In 1976 Congress
brought a measure of unification to the gift tax and the estate tax,
and in the course of doing so it replaced those two separate
exemptions with a single "unified credit," which was made available
against either or both taxes, as first incurred. In an effort to
produce an orderly transition from the earlier tax regime to the
later, Congress provided that a person (or the estate of a person) who
had claimed some or all of his lifetime "specific exemption" for
certain gifts could not later claim the full "unified credit" against
the gift or estate tax. Rather, the "unified credit" in such
circumstances was required to be reduced to reflect the transfer tax
benefit that the transferor had already garnered. The district court
held that this transitional rule as applied in this case was a species
of retroactive legislation, and that it was so arbitrary and
capricious as to render it unconstitutional under the Due Process
Clause of the Fifth Amendment.
A. The Statutory Framework
1. Prior to 1977, the estate tax and gift tax, while functionally
related, were separately imposed, separately administered, and
separately collected. The gift tax was and is recurrent (i.e.,
imposed and collected on an annual or quarterly basis) and, to
guarantee progressivity, it has always been cumulative. The
cumulation is accomplished by aggregating all taxable gifts made by a
taxpayer after June 6, 1932, and through the taxable period in which
subsequent gifts are made, in order to determine the tax rate or
"bracket" applicable to a particular gift. See 26 U.S.C. 2502. /1/
The gift tax provided an annual perdonee exclusion in a fixed dollar
amount; in 1976, the exclusion was $3,000 per donee. 26 U.S.C. (1976
ed.) 2503(b). /2/ The gift tax also provided a lifetime "specific
exemption" -- basically a deduction -- in the amount of $30,000 (26
U.S.C. (1970 ed.) 2521). A taxpayer could claim the specific
exemption, in whole or in part, whenever he chose.
The estate tax, of course, has never been recurrent, but is imposed
at graduated rates on the "taxable estate" (26 U.S.C. 2051). The
taxable estate has always been defined to include, not only property
owned by the decedent at his death, but also certain property that he
may have transferred during life, or which is subject to transfer
under specified circumstances relating to his death. In 1976, the
estate tax provided a $60,000 exemption -- again, basically a
deduction -- in determining the taxable estate (26 U.S.C. (1970 ed.)
2052).
Although the gift tax and the estate tax were separate in most
aspects, and although gift tax rates prior to 1977 were only 75% of
estate tax rates on comparable transfers, the two taxes were never
entirely unconnected. From the beginning, it was clear that some
property, the lifetime transfer of which was subject to the gift tax,
might also be includable in the transferor's estate for estate tax
purposes. Common examples were gifts in contemplation of death (26
U.S.C. (1970 ed.) 2035) and transfers with a retained life interest
(26 U.S.C. (1970 ed.) 2036). To alleviate the double tax burden in
such situations, Congress provided that, where the transfer of
property includable in the gross estate had previously been subject to
gift tax, a credit was allowable against the estate tax for the gift
tax paid (26 U.S.C. (1970 ed.) 2012). /3/
2. In the Tax Reform Act of 1976, Pub. L. No. 94-455, Tit. XX, 90
Stat. 1846 et seq., Congress substantially integrated the estate tax
and gift tax without greatly altering the coverage of either. The
first step was to bring the two rate structures into conformity. This
was done by making gift tax rates equal to estate tax rates. /4/
Then, in lieu of the $30,000 specific exemption from the gift tax and
the $60,000 exemption from the estate tax, Congress created, not an
exemption or deduction, but a credit against the taxes imposed, termed
the "unified credit," available against either or both taxes as first
incurred. /5/ Finally, a somewhat intricate mechanism for a degree of
unification was supplied by providing that the estate tax should be
determined (subject to the "unified credit") by a computation that
first aggregated the taxable estate and taxable gifts made after
December 31, 1976; computed a tax on that aggregate sum; and then
reduced the result by the gift tax payable on the gifts thus included.
/6/ Roughly speaking, the result was to treat the taxable estate as
the "ultimate taxable gift." See generally J. McCord, 1976 Estate and
Gift Tax Reform: Analysis, Explanation and Commentary (1977).
The 1976 Act was effective with respect to estates of decedents
dying after December 31, 1976, and with respect to gifts made after
that date. But while the Act inaugurated a measure of integration, it
did not purport to provide a completely fresh start and could hardly
have done so. Continuity with the past necessarily had to be provided
for. The estate of a decedent dying after 1976, for example, would
continue in many cases to include assets that he had disposed of
before 1977, such as property transferred in contemplation of death or
with a retained life interest. Where such prior transfers had been
subject to gift tax, the gift tax previously paid would produce a
credit against the post-1976 estate tax. And because the gift tax
itself remained recurrent and cumulative, gifts made before 1977
continued to affect the impact of the new and higher gift tax rates
applicable to gifts made during or after that year. See 26 U.S.C.
2501(a), 2502.
Most relevant for present purposes, a nettlesome question of
continuity arose from the fact that the $30,000 specific exemption
from the gift tax, which a taxpayer could have employed at the time or
times of his choice, was, together with the $60,000 exemption from the
estate tax, to be repealed, and the new "unified credit," applicable
against either or both taxes, substituted therefor. Obviously, some
taxpayers would have employed all or part of the $30,000 specific
exemption against pre-1977 gifts. The question was whether that fact
should call for an adjustment in the unified credit that they or their
estates might subsequently claim.
The bill reported by the House Ways and Means Committee on August
6, 1976, answered that question in the affirmative. It provided that
if the specific exemption had been claimed in whole or in part by a
taxpayer after June 6, 1932, the unified credit otherwise allowable
was to be reduced by 20% of the amount so claimed. H.R. 14844, 94th
Cong., 2d Sess. Sections 2010(c), 2505(c) (1976) (set forth at H.R.
Rep. 94-1380, 94th Cong., 2d Sess. 94, 131 (1976)). The Committee
explained its proposal as follows (H.R. Rep. 94-1380, supra, at 16):
As a transitional rule, the unified credit allowable is to be
reduced by an amount equal to 20 percent of the amount allowed
as a specific exemption in computing taxable gifts under present
law. Thus, in the case where a donor had benefited from the use
of the full $30,000 gift tax specific exemption under present
law, the maximum unified credit allowable would be reduced by
$6,000.
Although the legislative history does not address the matter, the
20% figure was apparently chosen because it was thought to approximate
the average effective gift tax rate, and thus to represent the average
transfer tax benefit realized by persons who previously had claimed
and been allowed some or all of the specific exemption.
The Conference Committee, in adding provisions of H.R. 14844 to the
pending Tax Reform Act of 1976, limited the scope of this transitional
rule. It agreed with the House that the new unified credit should be
reduced on account of certain gifts as to which the specific exemption
had been claimed. However, it decided that the reduction in the
unified credit should operate, not in the case of all gifts made after
June 6, 1932, but only in the case of gifts made after September 8,
1976 -- the date the Conference Committee approved the measure. The
Committee reports do not explain the reason for thus limiting the
scope of the transitional rule. /7/ But the transitional rule, with
the limitation added in conference, has uniformly been understood to
serve the objective of removing the incentive to make large gifts
during the period between September 8, 1976, and January 1, 1977 --
gifts that otherwise would have provided a double tax benefit in the
form of a $30,000 specific exemption under the old regime coupled with
an undiminished unified credit under the new. See Estate of Gawne v.
Commissioner, 80 T.C. 478, 483 (1983); R. Stephens, G. Maxfield & S.
Lind, Federal Estate and Gift Taxation Paragraph 3.02 at 3-4 n.9 (5th
ed. 1983); J. McCord, supra, Section 2.13, at 26.
The Tax Reform Act of 1976, incorporating the limited transitional
rule described above, was passed by both Houses of Congress on
September 16, 1976. It was signed by the President on October 4,
1976. The transitional rule is currently codified in 26 U.S.C.
2010(c) and 2505(c).
B. The Proceedings In This Case
The facts were stipulated (J.A. 4-22), and the case was submitted
to the district court on those stipulated facts (J.S. App. 2a). On
September 28, 1976, Charles Hirschi made gifts aggregating $45,000 in
value to five persons (ibid). Two days later, he reported those gifts
on a federal gift tax return, which indicated no tax due (id. at
2a-3a; J.A. 5, 8-13). The first $15,000 of his gifts, consisting of
$3,000 transfers to each of the five recipients, was exempt from gift
tax by virtue of the annual per-donee exclusion (26 U.S.C. (1970 ed.)
2503(b)). As to the $30,000 balance, Hirschi elected to apply the
full amount of his lifetime "specific exemption," thus eliminating any
tax (J.S. App. 2a; J.A. 5, 8-13).
Slightly more than two years later, on November 9, 1978, Hirschi
died (J.S. App. 2a; J.A. 5). Appellee Farmers & Merchants Bank filed
a federal estate tax return on behalf of the estate (J.A. 5, 14). On
Schedule G of that return, which is entitled "Transfers During
Decedent's Life," appellee included in the gross estate, as transfers
in contemplation of death, the $45,000 in gifts that Hirschi had made
on September 28, 1976 (J.S. App. 2a; J.A. 6, 15-18). The estate
claimed a unified credit of $34,000, the maximum amount allowable for
estates of decedents dying in 1978. J.S. App. 2a; J.A. 14; see 26
U.S.C. (1976 ed.) 2010(b). On audit, the Internal Revenue Service
determined that, since Hirschi had claimed a $30,000 specific
exemption for gifts made after September 8, 1976, and before January
1, 1977, the unified credit allowable to his estate was required to be
reduced by $6,000 -- 20% of the $30,000 specific exemption previously
claimed -- under the transitional rule of Section 2010(c). The
Commissioner accordingly proposed a deficiency in federal estate taxes
in the amount of $6,000 (J.S. App. 2a; J.A. 6).
Appellees paid the $6,000 deficiency in July 1982. The following
month, they filed a claim for refund of the tax thus paid (J.S. App.
2a; J.A. 7). Although the theory set forth in their refund claim was
not entirely clear, they appeared to contend that, since the property
that Hirschi had transferred in September 1976 had been included in
the gross estate, Section 2010(c) should be interpreted so as not to
require any reduction in the unified credit, even though Hirschi had
elected to claim the $30,000 specific exemption with respect to those
gifts (J.A. 20-22). Appellees argued that "it was not the intention
of the drafters of the Internal Revenue Code" to require reduction of
the unified credit in these circumstances, and asserted that the
Commissioner's construction of Section 2010(c) to require such a
reduction produced "inequitable treatment" that "(i)n essence * * *
results in double taxation" (J.A. 21).
Following the denial of their claim for refund, appellees brought
this refund suit in the United States District Court for the Southern
District of Illinois (J.S. App. 2a; J.A. 1). They again asserted
that Section 2010(c) should be construed so as not to call for any
reduction in the unified credit under the circumstances of this case.
In a supplemental brief, appellees contended alternatively that, if
Section 2010(c) were applied to require reduction of the unified
credit on account of gifts made before the statute's enactment on
October 4, 1976, it would to that extent be retroactive, and would on
that ground violate the Fifth Amendment by depriving them of property
without due process of law. /8/
The district court recited that "(t)he first issue raised by the
plaintiffs which we will address concerns whether the retroactive
provision of (26 U.S.C.) 2010 is unconstitutional and thus violates
the due process clause of the Fifth Amendment" (J.S. App. 3a). The
court acknowledged (id. at 3a-4a) that this Court has frequently
upheld retroactive application of income tax legislation, but, on the
asserted authority of Shanahan v. United States, 447 F.2d 1082 (10th
Cir. 1971), concluded that those decisions do not apply to transfers
subject to the estate and gift taxes. Rather, the court said, this
case was controlled by Untermyer v. Anderson, 276 U.S. 440 (1928),
where the Court held that the federal gift tax, newly imposed in 1924,
could not constitutionally be applied to gifts completed before its
enactment. The district court acknowledged that, in Milliken v.
United States, 283 U.S. 15 (1931), this Court subsequently upheld the
constitutionality of an amended estate tax statute as applied to a
previously-completed gift in contemplation of death, even though the
amendment worked to the estate's disadvantage by imposing higher tax
rates and requiring the previously-transferred property to be valued
at a higher figure. But the district court found Milliken
"distinguishable from the case at bar" and held that "the tax under
Section 2010(c) as applied to this transaction is so arbitrary and
capricious as to render it unconstitutional" (J.S. App. 5a, 6a).
Accordingly, and without discussing their statutory construction
argument, it entered judgment for appellees (id. at 7a).
SUMMARY OF ARGUMENT
The transitional rule incorporated in Section 2010(c) was designed
to accomplish an orderly transition to the new estate-and-gift-tax
regime that Congress enacted in 1976. The district court held that
this transitional rule, as applied to appellees, was a species of
retroactive legislation, and that its operation was so harsh as to
deprive them of property without due process of law. The district
court was wrong for at least four independent reasons.
First, the statute did not deprive appellees of property. As they
concede (Mot. to Dis. 6), the overall effect of the Tax Reform Act of
1976, including Section 2010(c), was to "reduce() the decedent's
estate tax by $655.16." This diminution of their tax liability can
scarcely be called a deprivation of property.
Second, the statute was not "retroactive" legislation. The estate
tax amendment that appellees challenge was enacted more than two years
before the testator died. The amendment did require that, in
computing the estate tax in 1978, his executors take into account the
fact that he had claimed the specific exemption in 1976. But this
Court has repeatedly rejected the idea that a tax is "retroactive"
merely because its operation depends on facts or conditions that came
into existence previously. Indeed, the operation of the estate tax
regularly depends on actions that the decedent may have taken many
years before his death. In characterizing Section 2010(c) as
"retroactive" legislation, therefore, the district court evalauted its
constitutionality under an erroneous premise.
Third, even if Section 2010(c) could properly be called a
"retroactive" statute, its application to appellees was not "so harsh
and oppressive as to be a denial of due process" (United States v.
Darusmont, 449 U.S. 292, 299 (1981)). Its lack of harshness is
particularly evident here, since the overall effect of the 1976 estate
tax amendments was to save appellees money. More generally, the
purpose of the transitional rule was to prevent taxpayers (or the
estates of taxpayers) who had claimed the specific exemption under the
old tax regime from deriving a double tax benefit from an unreduced
"unified credit" under the regime that Congress enacted in 1976. The
possibility of such a double tax benefit arose from the fact that the
unified credit was a substitute for the specific exemption. It is
well settled that due process is satisfied upon a "showing that the
retroactive application of the legislation is itself justified by a
rational legislative purpose." Pension Benefit Guaranty Corp v. R.A.
Gray & Co., No. 83-245 (June 18, 1984), slip op. 12 (emphasis added).
The transitional rule involved here clearly represented a rational
exercise of Congress's taxing power.
Finally, the decedent in this case "had ample advance notice"
(United States v. Darusmont, 449 U.S. at 299) of the proposed change
in the tax laws. The key congressional committees had issued reports
explaining the transitional rule, and the bill in which it was
incorporated had passed both houses of Congress, before the decedent
made the gifts at issue. He thus had constructive if not actual
notice of what the effect of claiming the specific exemption was
likely to be.
ARGUMENT
THE TRANSITIONAL RULE INCORPORATED IN SECTION 2010(c) IS VALID AS
APPLIED TO APPELLEES
A. There Is No Merit To Appellees' Statutory Argument Or To Their
Related Assertion That Section 2010(c) As Applied To Them Results In
Double Taxation
Before addressing appellees' constitutional claim, it seems
appropriate to dispel any confusion that may have arisen from certain
statements that they made in their claim for refund, and again in
their motion to dismiss. In their claim for refund, appellees
asserted that Section 2010(c) as applied to them "results in double
taxation" (J.A. 21). By this they appeared to mean that the effect of
Section 2010(c) was to tax twice the property that the decedent
transferred on September 28, 1976 -- first under the gift tax, and
then, when the property was included in the decedent's estate as a
transfer in contemplation of death, again under the estate tax.
Alternatively, appellees asserted that the inclusion of that property
in the gross estate, when combined with the reduction in the allowable
unified credit under Section 2010(c), "(in) effect results in a
doubling of the 34% rate of (estate) tax" (J.A. 22). Appellees repeat
both assertions, using slightly different words, in their motion to
dismiss (Mot. to Dis. 6, 7).
There is no factual basis for these statements. The single tax
that was assessed and paid with respect to the property transferred by
the decedent in September 1976 was the estate tax paid after
decedent's death in November 1978. No tax was paid with respect to
the transfer of that property in 1976 because the decedent elected to
apply the gift tax specific exemption of $30,000. That exemption,
coupled with the applicable annual exclusions, meant that no gift tax
was paid or payable with respect to the $45,000 transferred. When the
property was subjected to estate tax by reason of the decedent's death
in 1978, moreover, it was taxed, as the balance of his taxable estate
in excess of $250,000 was taxed, at the marginal estate tax rate of
34%. See 26 U.S.C. (1976 ed.) 2001(c); J.A. 14. Appellees'
assertions that the same property was taxed twice, or at double rates,
are thus squarely contrary to fact.
In reality, appellees' assertions about "double taxation" and
"double tax rates" are a factually erroneous way of characterizing --
indeed, one might say, of dramatizing -- the statutory construction
argument that they presented first in their claim for refund and then
to the district court. They argued that it would be "inequitable" to
reduce the estate's unified credit on account of the decedent's 1976
gifts, even though he had claimed and had been allowed the $30,000
specific exemption from gift tax with respect to those gifts, because
he had the misfortune to die within the next three years, with the
result that the property ended up being subject to tax anyway --
albeit to estate tax rather than to gift tax -- as a transfer in
contemplation of death. See J.A. 21-22. In essence, appellees argued
that they derived no benefit from the specific exemption, and hence
that it would "penalize() the unfortunate transferor" and his estate
to invoke Section 2010(c) against them (J.A. 22). They accordingly
urged that the statute be interpreted as inapplicable in these
circumstances.
Appellees' statutory construction argument is meritless. The
district court, while not addressing that argument specifically,
rejected it sub silentio in reaching the merits of their
constitutional claim. And their statutory argument has been
explicitly rejected by the only other court that has considered it.
Estate of Renick v. United States, 687 F.2d 371, 376-377 (Ct. Cl.
1982). On facts substantially identical to those here, the Court of
Claims found meritless the contention "that Section 2010(c) should be
construed so that the reduction in the unified credit is restored when
the gift is included in the gross estate (as a transfer in
contemplation of death) pursuant to Section 2035" (687 F.2d at 377).
"The plain language and legislative design of Section 2010(c)," the
court noted, "show that Congress intended the reduction to the unified
credit to occur in all cases where gifts were made during the
transition period and the specific gift tax exemption * * * was taken
by the donors" (687 F.2d at 376 (emphasis in original)). The court
squarely rejected the notion that "Congress intended to reduce the
unified credit only if the taxpayer had benefited" from the exemption
(id. at 377). "When the decedent made the gift," the court observed,
"it appeared that he would benefit" from the exemption, and that
appearance failed to become a reality only because of his untimely
death (ibid. (emphasis added)). Although the decedent's untimely
death might thus be said to have worked something of a tax
disadvantage to his estate, the Court of Claims correctly refused to
find that circumstance a sufficient justification to "imply an
exception to the statute" that Congress did not provide (id. at 376).
Contrary to appellees' contention, moreover, the situation in which
they find themselves is not "inequitable" at all. Prior to 1977,
there had always been an element of gamble in a taxpayer's decision
about whether and when to elect the $30,000 gift tax exemption. Since
the gift tax was cumulative and progressive, with pre-1977 gift tax
brackets ranging from 2 1/4% to 57 3/4% (26 U.S.C. (1976 ed.) 2502),
it made economic sense for a taxpayer who contemplated making
substantial gifts to defer claiming the exemption, since it would
eliminate considerably more in gift taxes if applied against later
gifts subject to tax in the higher brackets than if it were applied to
earlier gifts subject to tax in the lower brackets. Deferring the
election, on the other hand, created the alternative risks that the
taxpayer would die before ever claiming it, or that he would fail to
survive for three years after claiming it, in which case the gift as
to which it was claimed would be included in his gross estate as a
transfer in contemplation of death. In either of the latter events,
the specific exemption would basically be wasted.
In this case, as matters eventuated, it would have been better for
Hirschi and his estate had he not claimed the specific exemption for
the gifts he made on September 28, 1976, but had rather paid the
$2,250 in gift tax that would then have been due. See 26 U.S.C. (1970
ed.) 2502. In that event, his estate would have had credited against
the estate tax the $2,250 gift tax paid (26 U.S.C. 2012), and would
have enjoyed an unreduced unified credit of $34,000. On the other
hand, had Hirschi survived three years after making his gifts, the
$45,000 in property that he gave away in 1976 would have been excluded
from his taxable estate, and the estate tax due from his executors
would have been reduced accordingly. See 26 U.S.C. (1976 ed.) 2001.
As appellees acknowledge (Mot. to Dis. 8), Hirschi's gift tax return
for the third quarter of 1976 was not due until November 15 of that
year. But for his unusual haste, therefore, in filing his return two
days after making his gifts, he could have waited a week to see if the
President signed the 1976 Act, and then computed the relative
advantages and disadvantages of claiming the exemption, in view of the
uncertainties of life. If the situation in which appellees find
themselves is "inequitable," in other words, the inequity stems, not
from the Internal Revenue Code, but from the fact of human mortality.
B. The Application Of The 1976 Act To The Hirschi Estate Did Not
Deprive Appellees Of Property
Although the decedent in this case died in November 1978, the
district court characterized the application of the estate tax
provisions of the 1976 Act, including Section 2010(c), as retroactive,
and for that reason violative of the Due Process Clause of the Fifth
Amendment (J.S. App. 3a-6a). But the application of that law, however
characterized, deprived appellees of no property, with or without due
process. The estate tax return filed by appellees reported a taxable
estate of $402,242.10 (J.A. 14). They claimed a unified credit of
$34,000, and reported estate tax due of $81,690.56 (ibid). The
Commissioner accepted the return as filed, except that he reduced the
unified credit from $34,000 to $28,000, as he was required to do by
Section 2010(c). He accordingly assessed a deficiency of $6,000,
resulting in an estate tax of $87,690.56. If the provisions of the
estate tax as it stood in September 1976 had been applied to the same
taxable estate, however, the estate tax would have been $88,345.72.
See 26 U.S.C. (1970 ed.) 2001. As appellees concede, therefore,
"(t)he Tax Reform Act (of 1976) reduced the decedent's estate tax by
$655.16" (Mot. to Dis. 6). This diminution tax liability can hardly
be said to have been "so arbitrary and capricious as to render (the
law) unconstitutional," in the words of the district court (J.S. App.
6a), or in any fashion to have deprived the estate of property.
C. The District Court Mischaracterized Section 2010(c) As Retroactive
Legislation
Contrary to the district court's statement (J.S. App. 3a), Section
2010(c) as applied to appellees does not constitute "retroactive"
legislation, and the court thus proceeded from an erroneous premise in
holding it unconstitutional. When the decedent made his gifts in
September 1976, he received the benefit of the then-existing $30,000
specific exemption for gift tax purposes. The Tax Reform Act of 1976
was signed by the President one week later, and thus became law more
than two years before Mr. Hirschi died. When he died, his estate
received the benefit of the then-existing unified credit. It is true
that the unified credit was reduced by virtue of his already having
employed the gift tax specific exemption, which was one of the two
items for which the unified credit was a substitute. But his estate
derived considerably more value from the reduced credit of $28,000
than it would have derived from the $60,000 estate tax exemption that
existed when he made his gifts. /9/ In any event, this Court has
regularly held that an estate tax provision that is effective at the
date of death "does not operate retroactively merely because some of
the facts or conditions upon which its application depends came into
being prior to the enactment of the tax." United States v. Jacobs, 306
U.S. 363, 367 (1939) (footnote omitted). Accord, United States v.
Manufacturers National Bank, 363 U.S. 194, 200 (1960). /10/
Indeed, the application of the estate tax has regularly depended
upon facts and conditions that may have come into being prior to the
enactment of the tax. As noted above, the estate tax has never been
limited to property owned by the decedent at the time of his death,
but has always, in its original form and as amended, included in the
decedent's gross estate some property transferred or otherwise acted
upon by him at some earlier time. See, e.g., 26 U.S.C. (1970 ed.)
2035 (transfers in contemplation of death); 26 U.S.C. 2036 (transfers
with retained life estate); 26 U.S.C. 2037 (transfers taking effect
at death); 26 U.S.C. 2038 (revocable transfers). This Court has
never held that the estate tax operates "retroactively" simply because
that earlier time was a time before the enactment of the estate tax
provision dictating how such property or its transfer should be
treated for federal estate tax purposes. See, e.g., Commissioner v.
Estate of Church, 335 U.S. 632 (1949); Fernandez v. Wiener, 326 U.S.
340 (1945); Helvering v. Hallock, 309 U.S. 106 (1940); United States
v. Jacobs, 306 U.S. 363 (1939); Gwinn v. Commissioner, 287 U.S. 224
(1932); United States v. Wells, 283 U.S. 102 (1931).
D. The District Court Erred In Equating Retroactivity With
Unconstitutionality
Even if the 1976 Act, with its enactment of Section 2010(c), were
thought to have deprived appellees of property, and to have operated
"retroactively" by virtue of its look-back feature, its effect was not
so harsh or oppressive as to render it unconstitutional under the Due
Process Clause. This Court has sequarely rejected the idea that
retroactivity in an estate tax statute, any more than in an income tax
statute, perforce invalidates it. The Court has held that "a tax is
not necessarily and certainly arbitrary and therefore invalid because
retroactively applied," and has noted that "taxking acts having
retroactive features have been upheld in view of the particular
circumstances disclosed and considered by the Court." Milliken v.
United States, 283 U.S. 15, 21 (1931). The Court in Milliken upheld
the application of higher tax rates, imposed by an amended estate tax
statute, to a previously-completed gift in contemplation of death, and
also held that the gift could be valued for estate tax purposes at the
date of death rather than at the time the gift was made.
This case involves a transitional rule designed to prevent
taxpayers from manipulating the timing of their gifts so as to derive
a double tax benefit from the shift to a unified credit
estate-and-gift tax regime. The decedent, having elected on September
30, 1976, to claim the full $30,000 specific exemption then permitted
to him, had no claim to any further exemption on that score. Under
the version of the transitional rule adopted by the House Ways and
Means Committee, neither he nor his estate would have been entitled to
any further exemption, or to its equivalent in the form of an
undiminished unified credit, with respect to gifts that he had made at
any time after June 6, 1932. See pages 6-7, supra. He and his estate
gained no greater entitlement by virtue of the Conference Committee's
decision to limit the application of the transitional rule to gifts
made after September 8, 1976. That decision might be thought to have
conferred a windfall upon certain taxpayers who had the good fortune
to make gifts before the Conference Committee acted. But the
Committee's decision not to extend that windfall to taxpayers who made
gifts between September 8, 1976, and January 1, 1977, was plainly not
"so harsh and oppressive as to be a denial of due process." United
States v. Darusmont, 449 U.S. 292, 299 (1981). Such line-drawing is
an inherent feature of tax legislation. See United States v. Maryland
Savings-Share Insurance Corp., 400 U.S. 4 (1970). /11/
In holding Section 2010(c)'s transitional rule unconstitutional as
applied to appellees, the district court (J.S. App. 4a) relied chiefly
on Untermyer v. Anderson, 276 U.S. 440 (1928). As this Court has
repeatedly pointed out on the frequent occasions when it has
distinguished that decision, however, Untermyer involved the
retroactive application of the first gift tax statute -- a wholly new
tax enacted in 1924 -- to gifts irrevocably completed before its
effective date. See, e.g., United States v. Darusmont, 449 U.S. at
299-300 (distinguishing Untermyer); Milliken v. United States, 283
U.S. at 21 (same). Following this Court's lead the courts of appeals,
if not questioning the continuing vitality of Untermyer, have
uniformly viewed it as applying only to the retroactive application of
a wholly new tax. /12/ The Untermyer decision has no bearing upon
this case, which involves, not only an amendment to an existing tax,
but an amendment that was enacted two years before the taxable event
-- the transfer of property upon the decedent's death -- occurred.
E. Congress Provided Ample Advance Notice Of The Transitional Rule
That It Enacted, And This Fact Eliminates Any Basis For A Claim Of
Objectionable Retroactivity
Even if one were to accept appellees' contention that Section
2010(c) operates retroactively as applied to them, the decedent in
this case "had ample advance notice" (United States v. Darusmont, 449
U.S. at 299) of the proposed change in the tax laws. The House Ways
and Means Committee approved its version of the transitional rule on
August 6, 1976. The Conference Committee approved on September 8,
1976, the version that was eventually enacted. The bill passed both
houses of Congress on September 16, 1976. All these events occurred
before the decedent made his gifts on September 28, 1976. The pattern
of those gifts -- exactly $45,000 to five family members (J.A. 15-18),
tailored precisely to consume the specific exemption and the available
annual exclusion -- raises the irresistible inference that the
decedent planned the transaction with tax considerations in mind, if
it does not suggest that he had actual notice of the pending
congressional action. In any event, the Committee reports provided
him with constructive notice of what the effect of claiming the
specific exemption was very likely to be. This Court has regularly
held that there is no constitutional impediment to making a statute
effective, as here, from the date of public notice. Pension Benefit
Guaranty Corp v. R.A. Gray & Co., No. 83-245 (June 18, 1984), slip op.
13-14 ("assuming that advance notice of legislative action with
retrospective effects is constitutionally compelled, * * * we believe
that employers had ample notice" of the contingent liability imposed
by an amended pension statute); United States v. Darusmont, 449 U.S.
at 299 (same, amended tax statute); United States v. Hudson, 299 U.S.
498 (1937).
Especially should this be so where, as here, a provision with
retrospective aspects is adopted to prevent a "rush to the door" by
persons seeking to circumvent the accomplishment of the purpose of the
legislation. See Pension Benefit Guaranty Corp. v. R.A. Gray & Co.,
slip op. 10-13. /13/ It is well settled that "(t)he retroactive
aspects of legislation * * * meet the test of due process * * * simply
(upon a) showing that the retroactive application of the legislation
is itself justified by a rational legislative purpose" (id. at 12
(emphasis added)). It was entirely rational for Congress to remove
the incentive for taxpayers to seek the double tax benefit of a
$30,000 gift tax exemption, plus an undiminished unified credit, by
making gifts after September 8, 1976, and before the January 1, 1977,
effective date of the new law.
CONCLUSION
The judgment of the district court should be reversed.
Respectfully submitted.
CHARLES FRIED
Solicitor General
GLENN L. ARCHER, JR.
Assistant Attorney General
ALBERT G. LAUBER, JR.
Assistant to the Solicitor General
MICHAEL L. PAUP
ERNEST J. BROWN
Attorneys
NOVEMBER 1985
/1/ The cumulation begins with June 6, 1932, the date the present
gift tax was imposed. Revenue Act of 1932, ch. 209, Tit. IV, 47 Stat.
245 et seq. A noncumulative gift tax had previously been imposed by
the Revenue Act of 1924, ch. 234, 43 Stat. 253 et seq.; it was
repealed by the Revenue Act of 1926, ch. 27, Section 1200(a), 44 Stat.
125.
/2/ The $3,000-per-donee annual exclusion was established by the
Revenue Act of 1942, ch. 617, Section 454, 56 Stat. 953. It has since
been increased to $10,000. Economic Recovery Tax Act of 1981, Pub. L.
No. 97-34, Section 441(a), 95 Stat. 319.
/3/ Because of possible differences in value at the time of the
gift and at the time of decedent's death, differences in the amounts
of the taxable estate and of the aggregate of taxable gifts, and
differences in rates and structures, computation of the gift tax
credit may be complex, to say the least. See Treas. Reg. Section
20.2012-1 (1970).
/4/ Pub. L. No. 94-455, Section 2001(b)(1), 90 Stat. 1849 (amending
26 U.S.C. 2502(a)).
/5/ Pub. L. No. 94-455, Section 2001(a)(2), (3) and (4), 90 Stat.
1848 (adding 26 U.S.C. 2010, amending 26 U.S.C. 2012 and repealing 26
U.S.C. (1970 ed.) 2052); Pub. L. No. 94-455, Section 2001(b)(2) and
(3), 90 Stat. 1849 (adding 26 U.S.C. 2505 and repealing 26 U.S.C.
(1970 ed.) 2521).
/6/ Pub. L. No. 94-455, Section 2001(a)(1), 90 Stat. 1846 (amending
26 U.S.C. 2001).
/7/ Each report states simply that "the unified credit is not to be
reduced for any amount allowed as a specific exemption for gifts made
prior to September 9, 1976." H.R. Conf. Rep. 94-1515, 94th Cong., 2d
Sess. 607-608 (1976); S. Conf. Rep. 94-1236, 94th Cong., 2d Sess.
607-608 (1976).
/8/ Appellees' claim of unconstitutionality was based upon the
undisputed facts, and the government did not contend that their
argument represented an improper variance from the theory set forth in
their administrative claim for refund. Cf. Angelus Milling Co. v.
Commissioner, 325 U.S. 293 (1945); Scovill Mfg. Co. v. Fitzpatrick,
215 F.2d 567 (2d Cir. 1954). See Stip. para. 15 (J.A. 7).
/9/ For an estate subject (as was the Hirschi estate) to a 34%
marginal rate of tax, the $60,000 estate tax exemption in effect prior
to 1977 would have reduced the estate tax otherwise due by $20,400.
Under the Tax Reform Act of 1976, by contrast, the unified credit
provided to the Hirschi estate reduced the estate tax due by $28,000.
/10/ In United States v. Jacobs, the decedent had paid for property
and had it conveyed to himself and his wife as joint tenants in 1909,
seven years before the estate tax was first enacted in 1916 (306 U.S.
at 364). He died after the Revenue Act of 1924 required that jointly
held property be included in the gross estate of the decedent who had
furnished the consideration for the transfer. The Court noted that
the estate tax "was not levied on the 1909 transfer," but on the
testamentary transfer that occurred after the estate tax was amended
in 1924 (306 U.S. at 366). The Court accordingly held that the
amendment "was not retroactive" (ibid). In United States v.
Manufacturers National Bank, the decedent in 1936 had divested himself
of ownership of a life insurance policy at a time when that would have
removed the policy or its proceeds from his gross estate (363 U.S. at
196). The decedent, however, continued to pay the premiums on the
policy until he died (ibid). He died in 1954, after the Revenue Act
of 1942 made payment of premiums a test for inclusion of life
insurance proceeds in a decedent's gross estate. The Court held that
the 1942 amendment, having become effective long before the decedent
died, "cannot be said to be retroactive in its impact"; the fact that
"the policies were purchased and the policy rights were assigned
before the (1942 amendment) was enacted," the Court stated, was "not
material" (363 U.S. at 200). See also Fernandez v. Wiener, 326 U.S.
340, 354 (1945) (upholding estate tax amendment requiring that the
entire pre-existing community estate in a community property state be
included in the gross estate of the spouse first to die); Gwinn v.
Commissioner, 287 U.S. 224 (1932). If none of the cases summarized
above involved retroactivity -- and the Court uniformly stated that
they did not -- it is clear that the district court erred in
characterizing the application of Section 2010(c) as retroactive here.
/11/ Accord, e.g., Estate of Renick v. United States, 687 F.2d at
374-376 (rejecting due process challenge to Section 2010(c). Cf. Reed
v. United States, 743 F.2d 481, 485-486 (7th Cir. 1984), cert. denied,
No. 84-866 (June 3, 1985) (rejecting due process challenge to
retroactive application of 1978 estate tax amendment); Fein v. United
States, 730 F.2d 1211, 1212-1214 (8th Cir. 1984), cert. denied, No.
84-182 (Oct. 1, 1984) (same); Estate of Ceppi v. Commissioner, 698
F.2d 17, 20-22, (1st Cir.), cert. denied, 462 U.S. 1120 (1983) (same).
/12/ See, e.g., Fein v. United States, 730 F.2d at 1213-1214 ("the
modern trend of decisions has uniformly been to limit" Untermyer to
the "narrow situation" there involved); Estate of Ceppi v.
Commissioner, 698 F.2d at 21 (collecting cases and concluding that, in
light of this Court's subsequent decision in Milliken, "Untermyer at
best remains good law only for the proposition that a wholly new gift
tax cannot be applied retroactively"); Westwick v. Commissioner, 636
F.2d 291, 292 (10th Cir. 1980) (limiting Untermyer to "wholly new
types of taxes"); Buttke v. Commissioner, 625 F.2d 202, 203 (8th Cir.
1980) (reading Untermyer to bar "retroactive application of a wholly
new tax"), cert. denied, 450 U.S. 982 (1981); Sidney v. Commissioner,
273 F.2d 928, 932 (2d Cir. 1960) (Friendly, J.) ("If Untermyer remains
authority at all, it is so only for the particular situation of a
wholly new type of tax.") See generally Hochman, The Supreme Court and
the Constitutionality of Retroactive Legislation, 73 Harv. L. Rev. 692
(1960); Ballard, Retroactive Federal Taxation, 48 Harv. L. Rev. 592
(1935).
/13/ See also Purvis v. United States, 501 F.2d 311 (9th Cir.
1974), cert. denied, 420 U.S. 947 (1975) (sustaining application of
the interest-equalization tax, designed to stem outflow of investment
capital from the United States, retroactively to transactions
consummated during the year after introduction of the legislation);
First National Bank v. United States, 420 F.2d 425 (Ct. Cl.), cert.
denied, 398 U.S. 950 (1970) (same).